Gundlach, Ackman Weigh Fed’s US Bank Rescue Impact On Markets

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(Bloomberg) — The failure of a Silicon Valley bank and a government bailout of its depositors is sparking market bets on everything from the economy to the U.S. interest-rate outlook.

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Officials rushed to allay panic about the health of the US financial system by pledging to fully protect depositors’ money and allowing banks to lend under easier-than-usual terms.

Market participants have said the move should boost sentiment in the short term, but could pose moral hazard in the long term. And some of the biggest names in finance are weighing in with the warnings.

Bill Ackman, founder of Pershing Square, said more banks are likely to fail, while Jeffrey Gundlach, chief investment officer at DoubleLine Capital, said the Treasury market is now showing signs of an impending recession.

The new program would provide loans of up to one year in exchange for securities the Fed valued at 100 cents on the dollar – excluding the discount that is traditionally required. However, the central bank said it would have recourse beyond that collateral, a possible acknowledgment some securities could go bad.

Loans will be settled above 10 basis points where that day’s overnight bank lending gauge known as OIS is.

Here’s what investors and strategists are saying on how the latest developments could impact the markets:

bank failure

Bill Ackman, Founder of Pershing Square

“More banks will fail despite intervention, but we now have a clear roadmap on how the government will manage them. Our government did the right thing. It was not a bailout by any means. Those who have messed up will have to face the consequences. Investors who didn’t take care of their banks enough will be thrown out and bondholders will suffer a similar loss.

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in low price

Jeffrey Gundlach, Chief Investment Officer, DoubleLine Capital

“So, if I have it right, the Fed will make a loan on some collateral at a similar valuation that’s 40 percent less. Good.”

emotion boost

Priya Mishra, Global Head of Interest Rates Strategy, TD Securities

“Even if the SVB is sold, concerns about the liquidity and capital position of the banking system will remain. The new BTFP program provides liquidity for banks and should go a long way in helping sentiment. We would expect bank lending standards to further deteriorate, increasing downside risks. We remain long 10s even though we expect the Fed to keep hiking due to higher inflation. We anticipate a 25bp Fed hike in March and a terminal rate of 5.75%.

moral hazard

Rabobank strategists Michael Avery and Ben Picton

“If the Fed is bailing out anyone experiencing asset/rates pain now, they are in effect allowing a massive easing of financial conditions as well as a growing moral hazard. The implications for the market are that The US curve could flatten from the view that the Fed will soon actively line up its 1-year BTFP loans, where the fed funds rate will end up; or if people think the Fed will stop inflation. If allowed to stagnate with your actions, it can become even more serious.

no guarantee

Paul Ashworth, principal economist for North America at Capital Economics

“Arguably, this should be enough to prevent any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age. But contagion has always been more about irrational fear, so we’ll stress that there is no guarantee that it will work.

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Fed pause

Goldman Sachs Group Inc. Jane Hetzius and team in

“In light of recent stress in the banking system, we no longer expect the FOMC to raise rates at its March 22 meeting with considerable uncertainty about the way forward.”

relief rally

Erika Nazrin, analyst at UBS Securities

“We Think US Bank Shares Could Have a Sharp Relief Rally”. “Our customers may continue to prioritize flight over quality, which is ironically ‘Too Big to Fail but Now Have Regulated Being Tons of Liquidity and Capital Banks'”, namely JPMorgan, Bank of America and Wells Fargo.

dollar pressure

John Bromhead, strategist at Australia and New Zealand Banking Group

“The magnitude and speed of the policy response should the fear in the system. Similar to the UK pensions crisis in September or October, policy makers were able to effectively hedge risk and avoid any kind of systematic event. As a result we are seeing a jump in risk-sensitive currencies and it is dollar-negative. I suspect we may see further pressure on the USD, even if financial system concerns subside.

–With assistance from Adam Haigh, Cormac Mullen, Joanna Ossinger and Ronojoy Mazumdar.

(Updated all the time)

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